Bond market index
A bond index or bond market index is a method of measuring the investment performance and characteristics of the bond market. There are numerous indices of differing construction that are designed to measure the aggregate bond market and its various sectors (government, municipal, corporate, etc.) A bond index is computed from the change in market prices and, in the case of a total return index, the interest payments, associated with selected bonds over a specified period of time. Bond indices are used by investors and portfolio managers as a benchmark against which to measure the performance of actively managed bond portfolios, which attempt to outperform the index, and passively managed bond portfolios, that are designed to match the performance of the index. Bond indices are also used in determining the compensation of those who manage bond portfolios on a performance-fee basis. An index is a mathematical construct, so it may not be invested in directly. But many mutual funds and exchange-traded funds attempt to "track" an index (see index fund), and those funds that do not may be judged against those that do. Total return bond indices were first developed in the 1970s, at which point they measured only U.S. investment grade bonds. Indices for high-yield (below investment grade) U.S. bonds and non-U.S. government bonds were developed in the mid-1980s. During this period it became increasingly apparent that most portfolio managers were unable to outperform the bond market. This resulted in the development of passively managed bond index funds, and the proliferation of indices themselves. Characteristics that are relevant in judging bond indices include: The sample of securities: the number of securities in the index, and the criteria used to determine the specific bonds included in the index. Market sector measured: indices can be composed of government bonds, municipal bonds, investment grade corporate bonds, below-investment-grade (high-yield bonds), mortgage-backed securities, syndicated or leveraged loans.
